IRS Implements New Payroll Tax Exemption

By Robert Steere, Toolkit Staff Writer

If your business hires new employees during 2010, it may have a new opportunity to save tax dollars. An employer hiring new workers who were unemployed during the 60 days before beginning work can claim a special exemption from the 6.2 percent employer-paid portion of the payroll tax (FICA) normally required under the law. This results from implementation of the Hiring Incentives to Restore Employment (HIRE) Act signed by President Obama on March 18.

IRS Offers New Form W-11 and Revised Form 941

The Internal Revenue Service (IRS) has just released a new form to help employers document their claims for the new payroll tax exemption. Under the law, an employer can claim the credit only if it obtains written certification from each eligible new worker that he or she was unemployed during the 60 days leading up to the hiring date.

New Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, is now posted on the IRS website, along with answers to frequently-asked questions about the new payroll tax exemption for 2010 and the related new hire retention credit that will be available for 2011.

Using the Form W-11, each new worker must certify, under penalties of perjury, that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for anyone during the 60-day period. Employers are not required to use Form W-11 to meet the documentation requirement, but they can be assured that Form W-11 contains the certifications necessary under the law. The form can be presented to the new worker at the same time he or she fills out other employment forms, such as Form W-4.

Most eligible employers will be using Form 941, Employer's Quarterly Federal Tax Return, to claim the payroll tax exemption for eligible new hires. This form, revised for use beginning with the second calendar quarter of 2010, is currently posted as a draft form on the IRS website, and will be released next month as a final form along with related instructions.

Though employers need this certification in Form W-11 to claim both the payroll tax exemption in 2010 and the new hire retention credit in 2011, they do not file these statements with the IRS. Instead, they must retain them along with other payroll and income tax records. And, as noted above, Form W-11 is not mandatory. While it satisfies the documentation requirement, an employer can use any other written form it chooses that provides the same certification.

Background

The HIRE Act created two new tax benefits designed to encourage employers to hire and retain new workers in 2010.

First, employers who hire unemployed workers this year (after February 3, 2010, and before January 1, 2011) may qualify for a 6.2 percent payroll tax incentive, in effect exempting them from the employer's share of social security tax on wages paid to these workers after March 18.

This payroll tax reduction will have no effect on the employee's future Social Security benefits, and employers would still need to withhold the employee's 6.2 percent share of Social Security taxes, as well as income taxes. However, it can save an employer thousands of dollars per new worker during 2010.

In addition, for each qualified unemployed worker hired in 2010 and retained for a full year, an employer can claim a new hire retention credit of up to $1,000 per worker for 2011 when filing its 2011 income tax return in 2012.

These two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify for either of these tax incentives.

Posted April 14, 2010.